Sun-Oracle Deal Remakes the IT Landscape

Monday morning’s news that Oracle (NYSE:ORCL) had agreed to buy Sun Microsystems (JAVA) has implications for a host of companies in the IT technology sector; the deal also raises a variety of so-far unanswered questions. Here are some of the things you ought to be thinking about in the wake of the proposed deal.

Combined with Cisco’s (NASDAQ:CSCO) recent move into the sector, the market for servers continues to get increasingly competitive. All of a sudden, Hewlett-Packard (NYSE:HPQ), [[IBM]] and Dell (NASDAQ:DELL) find themselves facing Cisco and Oracle. This can’t possibly be good news for HPQ, IBM or DELL.

There is speculation that this could lead to a new wave of vertical consolidation moves - in particular by, natch, HPQ, IBM and DELL. Among the potential targets, according to Deutsche Bank’s Chris Whitmore, are NetApp (NASDAQ:NTAP), EMC (EMC), Juniper (NYSE:JNPR) and Brocade (NASDAQ:BRCD).

While regulators will likely take a close look at the deal, the combination not does carry the same concentration of power that an IBM deal with Sun would have involved. Stifel Nicolaus regulatory analyst Blair Levin writes Monday that the deal is likely to be approved, since “it does not reaise the issues regarding consolidation in the server and and storage markets that would have been problematic for a deal with IBM.”

This sure feels like a big deal - you can bet there will be a big banner headline in Tuesday’s San Jose Mercury News - but it is only the third-biggest for Oracle. The company paid $8.5 billion for BEA Systems (BEAS), and $10.3 billion for Peoplesoft. This is the company’s first big deal since the $3.3 billion purchase of Hyperion in 2007. (The Sun deal is worth $7.4 billion, or $5.6 billion net of cash and debt.)

Cowen’s Peter Goldmacher contends the deal was a “defensive maneuver” to keep Sun away from IBM.

Goldmacher and other analysts note that the deal raises margin issues for Oracle; he says the company will certainly cut head count at Sun - I suspect this day will go down as a bittersweet one for many current Sun employees - but not enough in the short-run to counteract the effect of adding Sun’s lower margin business to Oracle’s mix. Morgan Stanley’s Adam Holt writes that Oracle’s shares “may tread water until investors get more comfortable with ORCL’s revenue and margin profile going forward.”

Goldmacher contends the deal will “likely accelerate the already fraying ecosystem of partnerships in the IT ecosystem and where the impact of this deal will have material and lingering effects long after the Street comes to grips with the margin story.” He thinks the biggest negative implications are gor HP, a long-term Oracle partner.

Standard & Poor’s anaylst Zaineb Bokhari Monday morning cut his rating on Oracle to Hold from Buy. “We are concerned about ORCL’s entry into hardware and the impact it could have on operating margins.”

On the other hand, Thomas Weisel Partners analyst Tim Klasell writes that the slide in ORCL shares today presents a buying opportunity.

On a conference call Monday morning, Oracle Chairman Larry Ellison said the most important Sun products to Oracle are the Sun Solaris operating system and Java. That raises some questions about what Oracle plans to do with some non-strategic parts of Sun, including its tape storage business. With no Q&A on the call, there are no answers to questions like: What role will Sun CEO Jonathan Schwartz take, if any? How many jobs will be cut? What parts might get sold off?

While JAVA shares are higher, as you would expect, ORCL is trading lower.

In today’s trading:

JAVA is up $2.43, or 36.4%, to $9.12.

ORCL is down 45 cents, or 2.4%, to $18.61. (Pretty small gain, given today’s 3.4% Nasdaq drop.)